JK Paper Ltd Research Report By Edelweiss

JK Paper Ltd: Q4FY18 Result Update

Strong Q4FY18 result; healthy B/S to support future capex plan

JK Paper Ltd (JKP) reported PAT in Q4FY18 came 14.6% ahead of our estimate due to better than expected improvement in operating margin (+243 bps) and sharper than expected reduction in interest cost (-10.7%).

However, the improvement in performance was largely in-line with the industry. We believe the performance of the company to remain strong over the next 2-3 years due to favourable pricing environment in the global market and sharp rupee depreciation in the past few months whereas rawmaterial cost is expected to remain well under control.

We maintain our ‘Tactical Buy’ rating on JKP with a target price of INR 195 per share. Our target price is based on a 6x multiple to arrive of FY20 EBITDA estimates, which is relatively in-line with the 15-year historical average multiple of 5.8x.

Strong operating performance on higher realization and lower RM/employee cost

JKP’s operating income grew by 7.6% y-o-y to INR 752 crore in Q4FY18 driven by higher sales volumes (+5%) and improved realization (+2.5%).

However, operating income came 5.1% below our estimate due to lower than expected sales volume on the back of lower trading activities and maintenance shutdown for 10 days in Q4FY18 for Odisha unit.

EBITDA margin improved from 20.4% in Q4FY17 to 22.3% in Q4FY18 (vs our estimate of 19.9%) due to

a) higher realization vis-à-vis stable raw-material cost,

b) narrowing of difference in domestic and export realization from 8-10% to ~3% due to rising paper prices in the global market, and

c) lower employee cost.

Higher operating profit and lower interest expense resulted in sharp improvement in PAT (+30.7% y-o-y) in Q4FY18.

Strong cash profit and healthy debt protection metrics to support proposed capex plan

JKP has announced its capex plan to set up a 160 ktpa pulp facility and 200 ktpa packaging board facility at Unit CPM, Gujarat at a cost of INR 1,450 crore.

Given the strong cash generation (cash profit improved from INR 302 crore in FY17 to INR 422 crore in FY18) & improved debt protection metrics (net debt/EBITDA is the lowest in the past 15 years at 1.70x in FY18), we believe JKP should be comfortably able to fund the capex without resorting to any equity dilution in the future.

Even after the company raises the entire debt (assumed debt equity ratio of 55:45) for its proposed packaging board facility, net debt/EBITDA is projected to remain at healthy levels (at 1.51x in FY20 and 1.59x in FY21) in the future.

The management expects the project to be completed within 18-24 months from the date of receipt of environmental clearance.

We have assumed the project to get commissioned by March 2021.

Outlook and valuations: ‘Tactical BUY’

We maintain our ‘Tactical Buy’ rating on JKP with a TP of INR 195 per share. Our target price is based on a 6x multiple of FY20 EBITDA estimates, which is relatively in-line with the 15-year historical average multiple of 5.8x.

We believe JKP is the best placed among its major peers to reap benefits of positive domestic industry fundamental; b) sharp rise in global pulp prices due to nil reliance on imported hardwood pulp vis-a-vis relatively stable price outlook for domestic wood; and c) sharp rupee appreciation in the past few months.